What is an FHA mortgage insurance premium?
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Key takeaways
- If you take out an FHA loan, you must pay FHA mortgage insurance premiums (MIP).
- MIP comes in two forms: Upfront mortgage insurance premiums that can be financed into the loan amount and annual premiums that are included in the borrower’s monthly mortgage payment.
- The amount of time you’ll have to pay MIP and the size of your premiums depend on your down payment amount.
FHA loans come with lenient credit score requirements, low down payments, reasonable closing costs and competitive interest rates. However, they do have one big drawback: mortgage insurance premiums (MIP). It’s an extra, inescapable expense of having an FHA loan.
Here are the details on FHA mortgage insurance: how it works, how much it costs and how long you have to pay it.
What is an FHA mortgage insurance premium (MIP)?
An FHA mortgage insurance premium (MIP) is an additional fee you pay to protect the lender in case you default on your FHA loan.
FHA borrowers must pay two mortgage insurance premiums: one upfront at closing and another annually for as long as they repay the loan, in most cases. You will pay each premium a little differently.
Mortgage insurance is not unusual in the mortgage lending world: It’s common for so-called riskier borrowers, who have lower credit scores and make small down payments. On conventional loans (private mortgages), there’s an equivalent, private mortgage insurance (PMI), that’s routinely imposed on borrowers who put less than 20 percent down. However, PMI on a conventional loan can typically be canceled once a homeowner has built up 20 percent equity in their home. MIP cancellation is not connected to the build-up of equity, so you continue to pay the annual premiums, regardless of your ownership stake in the home.
How much does FHA mortgage insurance cost?
- FHA upfront mortgage insurance premium: 1.75 percent of the loan amount
- FHA annual MIP: Varies based on the size, term and loan-to-value (LTV) ratio of the loan
MIP costs can vary depending on a few factors, including the term of your loan and the amount of money you put down. Shorter terms and larger down payments tend to result in lower MIP costs.
Upfront mortgage insurance premium
The upfront mortgage insurance premium must be paid regardless of your down payment and is usually added to your mortgage principal. The upfront mortgage premium is a lump sum equal to 1.75 percent of your mortgage loan. If you prefer and can afford to, you can pay the upfront in cash rather than roll it into your mortgage, but that can be expensive. If you plan on replacing your FHA with a conventional mortgage, be aware the upfront mortgage insurance premium is only refundable with an FHA loan.
Annual mortgage insurance premium
Your premium mortgage insurance payment is based on the mortgage term, base loan amount and the loan-to-value (LTV) ratio. This annual premium (paid in 12 installments yearly) is added to your monthly mortgage payment. Depending on your down payment size, you’ll have to pay this premium for 11 years or the length of the loan. Like the upfront premium, the annual premium is a required part of an FHA loan, no matter the loan size or your down payment.
| Loan amount | LTV | Mortgage insurance premium in basis points | Duration of insurance payments |
|---|---|---|---|
| $726,200 or less | 90% or less | 50 (0.50%) | 11 years |
| 90% to 95% | 50 (0.50%) | Entire loan term | |
| More than 95% | 55 (0.55%) | Entire loan term | |
| More than $726,200 | 90% or less | 70 (0.70%) | 11 years |
| 90% to 95% | 70 (0.70%) | Entire loan term | |
| More than 95% | 75 (0.75%) | Entire loan term |
| Loan amount | LTV | Mortgage insurance premium in basis points | Duration of insurance payments |
|---|---|---|---|
| $726,200 or less | 90% or less | 15 (0.15%) | 11 years |
| More than 90% | 40 (0.40%) | Entire loan term | |
| More than $726,200 | 78% or less | 15 (0.15%) | 11 years |
| 78% to 90% | 40 (0.40%) | 11 years | |
| More than 90% | 65 (0.65%) | Entire loan term |
| Loan amount | LTV | Mortgage insurance premium in basis points | Duration of insurance payments |
|---|---|---|---|
| Note: These premiums apply to refinances of FHA loans closed on or before May 31, 2009. The MIP refinance terms for subsequent mortgages are the same as those on regular FHA loans. | |||
| Any | 90% or less | 55 (0.55%) | 11 years |
| More than 90% | 55 (0.55%) | Entire loan term | |
Example of an FHA MIP payment
Upfront mortgage insurance premiums can be, and often are, financed into the loan amount, explains Peter Boomer, a former mortgage executive vice-president with PNC Bank in Chicago and president of Proper Rate. Annual premiums are included in the borrower’s monthly mortgage payment.
If you borrow $100,000 and roll the cost of the FHA upfront MIP into your loan, your loan amount will increase to $101,750 (an additional 1.75 percent of the loan amount). Naturally, that increases your monthly payment, as well. For example, on a $101,750 30-year fixed-rate FHA loan at 7.5 percent, your monthly mortgage payment (excluding homeowners insurance and property taxes) would be $711, compared to $699 without financing the MIP.
Tack on the annual premiums, too, and your monthly payment will rise further, adding about another $47 per month, bringing the total to $758 with MIP financed into your loan. That’s assuming you make a minimum down payment of 3.5 percent, in which case you’ll be charged an annual MIP rate of 0.55 percent.
0.55%
Source: Federal Housing Administration
How long will you pay FHA MIP?
“The length of time that a borrower pays the monthly mortgage insurance premium varies depending upon the original loan terms,” says Boomer. The primary factor: how big of a down payment you make.
Current guidance states that FHA loan borrowers who put down less than 10 percent must pay FHA mortgage insurance until the entire loan term ends. So, if you have a 30-year mortgage, and you choose the popular 3.5 percent down payment option, you’ll be paying your MIP for the entire term (or for as long as you have the loan).
If you put down at least 10 percent, you can have FHA MIP removed after 11 years of payments. So if you take out a 30-year mortgage in 2023, made a 15 percent down payment and make payments until 2034, the remaining 19 years of your loan would be without a mortgage insurance payment.
The above is simple enough — but it applies to newly originated FHA loans. The FHA has changed its rules more than once on this issue, and often those changes aren’t retroactive. So here’s a brief history:
| Loan Origination Period/Year | MIP Cancellation Terms |
|---|---|
| July 1991-Dec. 2000 | None. Must pay for the entire loan term. |
| Jan. 2001-June 3, 2013 | After 5 years. You must have 22 percent home equity (78% LTV) in the property, plus make all payments on time. |
| After June 3, 2013 | MIP Cancellation Terms: 10% or more down (cancel year) | MIP Cancellation Terms: less than 10% down |
|---|---|---|
| 2014 | 11 years (2025) | MIP until the end of the mortgage |
| 2015 | 11 years (2026) | MIP until the end of the mortgage |
| 2016 | 11 years (2027) | MIP until the end of the mortgage |
| 2017 | 11 years (2028) | MIP until the end of the mortgage |
| 2018 | 11 years (2029) | MIP until the end of the mortgage |
| 2019 | 11 years (2030) | MIP until the end of the mortgage |
| 2020 | 11 years (2031) | MIP until the end of the mortgage |
| 2021 | 11 years (2032) | MIP until the end of the mortgage |
| 2022 | 11 years (2033) | MIP until the end of the mortgage |
| 2023 | 11 years (2034) | MIP until the end of the mortgage |
Can you avoid FHA mortgage insurance?
Basically, no — if you’re using the FHA loan program. All FHA loans involve mortgage insurance, either for the life of the loan or for a set number of years.
You can avoid FHA mortgage insurance by:
- Obtaining a lender-paid mortgage insurance (LPMI) loan – An LPMI loan can be an option if you’re not willing or able to make a 20 percent down payment. With this type of loan, the lender covers the PMI in exchange for a higher interest rate.
- Exploring a piggyback loan – With this type of loan, you make a 10 percent down payment, then get a second mortgage to add another 10 percent to your down payment. You wind up with a 20 percent down payment overall, avoiding PMI, but you’ll have to repay two loans.
- Looking into special programs – Some programs allow borrowers to make a low down payment without PMI. These range from VA loans (for eligible military members) to programs directly from major banks and lenders. Many are geared to first-time homebuyers.
- Using a different lending program – This could mean getting a conventional loan with a 20 percent down payment, but there are other options. One option is accepting an FHA loan and the MIP it comes with, then refinancing into a non-FHA loan once you’ve built enough equity (20 percent) in your home.
If you plan on refinancing your FHA loan with another FHA-insured mortgage within three years, you may get an upfront MIP refund credit to reduce the amount you must pay on the new refinanced mortgage, according to HUD. However, if you replace it with a conventional mortgage, you will not get a refund for the upfront mortgage insurance premium.
The differences between FHA MIP vs. PMI
Private mortgage insurance (PMI) only applies to conventional loans when a buyer makes a down payment of less than 20 percent. The amount you’ll pay for PMI depends on factors like your credit score, loan size, down payment amount and lender. Conversely, when you get an FHA loan, you must pay MIP, no matter what your down payment is.
Generally speaking, though, for borrowers with excellent or very good credit (FICO scores of 740 or higher), PMI payments can be lower than MIP payments. The latter’s cost depends on how much money you can put down upfront when you take out an FHA loan. The more you can put down, the lower your monthly MIP payment will be.
PMI costs vary, but you’ll pay roughly between $30 and $70 per month for every $100,000 you borrowed, according to Freddie Mac. While those figures may look larger than MIP percentages, the fact that MIP payments must be made for at least 11 years or the lifetime of the loan often makes them more expensive overall than PMI.
Bottom line on FHA mortgage insurance
Despite the high cost of FHA mortgage insurance, you might not have to pay MIP forever, depending on your down payment amount or if you refinance. And FHA loans have advantages, especially for buyers who find it difficult to save for a down payment due to a high debt-to-income ratio or lower income. In short, while it’s a drag, MIP shouldn’t be a deal-breaker if an FHA loan remains your best option for realizing your homeownership dream.
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